ii. Explain whether each of the stocks are correctly priced explaining your responses. Illustration 2 An investor believes that a share of the XYZ Company will be worth ZAR 100 one year from now. How much is the investor willing to pay for one share today if the risk-free rate is 8%, the expected rate of return on the market is 18% and the company beta is 2.0? Illustration 3 The following data are available to you as a financial analyst: Security Expected Return Beta Standard Deviation A 0.32 1.70 0.50 B 0.30 1.40 0.35 C 0.25 1.10 0.40 D 0.22 0.95 0.24 E 0.20 1.05 0.28 F 0.14 0.70 0.18 Market 0.12 1.00 0.20 Treasury Bills 0.08 0 0 Required: a) In terms of the security market line, which of the securities are undervalued? Why? b) Assuming that a portfolio is constructed using equal portions of the six stocks listed above: i) What is the expected return on and risk of such a portfolio? ii) What would be the expected return and risk if this portfolio were margined at 40% with the cost of borrowing at the prevailing risk-free rate? c) Now suppose a portfolio is constructed in which 20% of the funds are invested in treasury bills and the rest in a portfolio of the first four stocks, what would be expected return of this new portfolio?